SAN FRANCISCO — California Attorney General Jerry Brown yesterday said he has issued subpoenas to the three major rating agencies as part of an investigation into whether they violated state law by giving high ratings to subprime mortgage-backed securities and other complicated debt instruments that proved to be worthless as the housing market bubble burst.
Brown said his office’s probe focuses on whether Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings violated California laws prohibiting unfair and deceptive business practices.
“We think this is a very serious matter that has not been adequately investigated by federal authorities,” he said.
According to Brown, the rating agencies worked behind the scenes with the creators of those complicated financial securities, earning billions of dollars in revenue to assign their highest ratings for securities that became worthless after the collapse of the housing market.
“This is one of the dark sagas of American financial history,” Brown said.
He said his office is acting because the rating agencies haven’t been held to account for actions that have spread financial pain and suffering across the country, to investors and homeowners.
“They’re a type of untouchable that says we get to make a lot of money, and we get to make the ratings, and you can’t touch us,” Brown said.
Brown’s subpoenas are far from the first legal action the raters are facing. In addition to investor lawsuits, Connecticut Attorney General Richard Blumenthal filed suit last year charging that the agencies gave municipal bonds lower credit ratings than were merited.
Blumenthal yesterday said the Connecticut suit is still pending, and the state is still trying to have it returned to state court. He filed suit in July 2008 in state court and the case was removed to federal court in August 2008.
"We also have an investigation ongoing into certain anti-competitive practices, under our antitrust authority," Blumenthal said.
Brown said his investigation is not directed at the ratings of municipal debt.
Despite yesterday’s announcement, the California probe has been underway at least since October, when Ambac Financial Group Inc. received a notice from the attorney general asking it to preserve “potentially relevant evidence” in connection with an investigation into credit rating practices, the firm announced last year in a quarterly report filed with the Securities and Exchange Commission.
Brown said he didn’t want to predict a timeline for how long it will take to investigate. “This is not a case where you snap your finger and get a couple of boxes of documents,” he said.
He said the agencies will have until Oct. 19 to provide information related to a number of questions. They include: whether the rating agencies failed to conduct adequate due diligence in the rating process; whether they gave high ratings to particular securities when they knew or had reason to know that high ratings were not warranted; whether they failed to comply with their own codes of conduct in rating certain securities; whether they made fraudulent representations concerning the quality or independence of their ratings; and whether they conspired with the companies whose products they rated to the detriment of investors.
“Moody’s has received inquiries from various state and regulatory authorities seeking information about our ratings,” Moody’s spokesman Michael Adler said in an e-mailed statement. “We will review this inquiry once it is received and will offer our cooperation as appropriate.”
Standard & Poor’s spokeswoman Ana Sandoval said the agency will not comment at this time as it has yet to receive a subpoena. Fitch spokesman Kevin Duignan said the agency regularly provides information to regulatory and state authorities as requested and expects to provide similar information in this situation once the request is received.
California Treasurer Bill Lockyer, Brown’s predecessor as attorney general, is a vocal critic of the rating agencies.
